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Anxiety about the Florida State Board of Administration’s “unique” entanglements with Enron Corp., including the failed energy trader’s ties to Gov. Jeb Bush, is at the core of an order denying Florida’s bid to lead an enormous legal effort to recover damages for Enron’s battered investors. U.S. District Judge Melinda Harmon in Houston reasoned in an 84-page order that those relationships are so fraught with potential conflict they jeopardized the class action lawsuit’s chance of success. “In good conscience this court cannot endanger this litigation by ignoring the issues created by FSBA’s unique involvement with Enron,” Harmon said in her Feb. 15 order. Much of that involvement concerns the state pension fund’s former money manager, Alliance Capital Management Holding L.P., the judge said. The board, which manages $96 billion in Florida pension funds, lost more than $325 million on its investments in Enron common stock last year — the worst shellacking absorbed by any institutional investor in the nation. Many of those shares were purchased on Alliance Capital’s recommendation as Enron was collapsing in the wake of public disclosures about losses and fraud. Florida lost $9 million more on Enron bonds. The state’s legal strategy to recover those losses is unclear. It could pursue the class action as a subordinate player, opt out of the Enron class and file a suit of its own, or sue Alliance Capital. Florida’s first legal step was to file its unsuccessful motion in Houston, seeking to lead the class action that was initially brought by others and was consolidated by Judge Harmon on Dec. 13. Today, there are more than 50 individual and corporate plaintiffs, including big pension funds from Alabama, Georgia, Ohio, Washington, New York and California. The California Board of Regents won lead-plaintiff status, giving it more leverage in setting strategy and negotiating a settlement. One lawyer involved in the case who was interviewed for this article, and who asked not to be named, said Gov. Bush has privately stated he’d be happy if Florida recovers 30 cents on the dollar. But no decision on how to proceed is imminent. And none will be made until after the Florida attorney general’s office finishes a related investigation, said board general counsel Linda Lettera. Harmon’s explanation for denying Florida lead plaintiff status in the Enron class action, filed Oct. 22, is suffused with specific concerns about conflicts of interest, especially regarding Alliance Capital. For example, the court ruled Florida was unfit to lead because its “issues and interests” in the class action suit are “atypical of and antagonistic to those of the rest of the class.” Among the evidence, Harmon cited the fact that Florida’s Board of Administration bought 2.9 million shares of Enron common stock on Alliance Capital’s recommendation while Enron was nose-diving. “FSBA’s purchase of Enron stock between Oct. 19-Nov. 16, 2001, after the initial public disclosure regarding Enron’s overstatement of its assets and partnership liabilities, after the first suits in this consolidated action were filed, [and] after the SEC announced that it was investigating Enron, creates a conflict of interest with those who purchased stock before the disclosure,” the judge wrote. “Because FSBA did not buy this stock based in reliance either on the market on or statements by Enron or its agents … it [could face] unique defenses rending it atypical of the putative class.” Fighting such different defenses would “more than distract” Florida from the necessary duties of lead plaintiff, the judge ruled. Pursuing the conflict angle, Harmon observed that Alliance Capital was Enron’s largest institutional shareholder, and noted that Alliance managing partner Frank Savage was on Enron’s board of directors. Likewise, the judge pointed to evidence presented to the court that the Alliance adviser who actually purchased the Enron shares for Florida’s pension board, Alfred Harrison, had “business ties” to Savage. Harmon’s thinking that Florida was too conflicted to lead the class action litigation is rooted in that conflict. She said the conflicts make it a “clear possibility, indeed even a probability,” that Florida will sue Alliance apart from its class action claim. HOW MIGHT SUCH A CLAIM GO IN COURT? The judge offered a scenario that doesn’t look good for Florida if it intends to assert claims of securities fraud. She said it could be argued the relationships between Alliance Capital and Enron — notably Savage’s role as an Enron board member — gave Florida’s Board of Administration “actual or constructive” insider knowledge about Enron’s troubled finances, including the off-balance sheet partnerships used to hide Enron’s debts and inflate its earnings. “If so, FSBA may not have a securities fraud claim for much of its investment because its investment decision-maker was not deceived,” said Judge Harmon. The smell of blood, however, is in the water. Last week, members of the Florida Senate Governmental Oversight and Productivity Committee wondered publicly why the Board of Administration waited so long to terminate Alliance Capital. And recently, the Florida attorney general’s office — which does not represent the board, but has been conducting a separate investigation — subpoenaed both Enron and Alliance. Thus far, however, Florida officials have insisted that no decision has been made about whether to sue Alliance. But in recent weeks, eight law firms from Miami and elsewhere have made formal pitches to the Board of Administration to represent Florida against Alliance Capital. Another potential conflict cited by the judge, and asserted by lawyers for other class members, involves Gov. Jeb Bush. Bush is one of three board trustees, including fellow elected Republicans state Treasurer Tom Gallagher and Comptroller Robert Milligan. Bush “received $6,500 from Enron for his 1998 campaign, and in November 1999, during the class period, meet with Enron officials to discuss a possible joint venture between Florida and an Enron entity, Azurix,” the order says. Harmon did not explore that potential conflict, but it involved a proposal by Azurix to finance part of the Everglades restoration project in exchange for selling water, according to the St. Petersburg Times. The idea didn’t get far, however, and last summer Azurix was acquired by American Water Works. Aside from issues of conflict, Harmon had other reasons why Florida shouldn’t be the lead plaintiff in the Enron class action. She was skeptical about Florida’s “late-hour” decision — three weeks after the court’s deadline — to team up with the New York City pension funds in the effort to be named lead class plaintiff. The New York funds lost $109 million when Enron collapsed. Harmon’s order indicated she believed the grouping was “a manipulated effort” by two giant claimants with no cohesion or “mutual litigation experience.” In effect, the judge ruled it was a marriage of convenience aimed at winning lead plaintiff status. If that weren’t enough, Harmon held Florida’s pension board was disqualified as a “professional plaintiff” as defined in the federal Private Securities Litigation Reform Act of 1995. The Daily Business Review previously reported that during the last five years, the state board has sought to be lead plaintiff in 13 other securities fraud cases, and served as lead in nine. The judge felt such “numerous” other involvements would be distracting. “Were the professional plaintiff provision the only reason for denying FSBA & NYC funds’ application … the court might be more prone to consider … a waiver, but as indicated, it has other concerns about his group,” Harmon wrote. Florida filed a motion to lead the class, but has yet to actually sue to recover its losses. It hoped to lead the unfolding class action as a way of controlling legal strategy and any settlement negotiations. But the federal court’s rebuff has prompted Florida to consider another path to the courthouse. An alternative strategy would be to opt out of the massive class action to pursue its own civil lawsuit. “I think it’s fair to say that Florida will take a hard look at an opt-out strategy,” said Michael J. Pucillo, a prominent West Palm Beach securities litigator. Pucillo represented the FSBA in its motion for lead plaintiff status. “There’s a distinct possibility that [other] large pension funds will opt out and bring their own cases.” Pucillo’s firm, Berman DeValerio Pease Tabacco Burt & Pucillo, is one of two firms that represented the pension board in its Enron class action motion. The other is Entwistle & Cappucci, a New York firm with an office in Tallahassee. While the court’s ruling was a blow to Florida, it was a bigger blow to those firms that lost out to William S. Lerach, of the San Diego office of Milberg Weiss Bershad Hynes & Lerach. Lerach represents the University of California Regents. The Washington Post and others have estimated the Enron class action, described by Judge Harmon as “probably the largest and most complex of its kind in the history of this country,” could throw off nine-figure legal fees. “We aren’t happy about it,” said Pucillo, who has represented the board on various matters for about five years. Rather, Pucillo emphasized his continuing “good relationship” with the pension fund. It’s a relationship he’s hoping will count for a lot as he seeks to convince the board to opt out — a strategy that would keep him, and presumably New York’s Entwistle & Cappucci, employed on the huge case.

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